UNDERSTANDING

ACCOUNTING
AND FINANCIAL
INFORMATION

GO
GROUP 9
 What exactly is
ACCOUNTING?

 Recording
Financial
 Classifying
 Summarizing OF events &
transactions
 Interpreting
 What is ACCOUNTING
for?

“Provide management and related parties

information to make good decisions.”
 The ACCOUNTING
system
INPUTS
 Sales documents
 Purchasing documents
 Shipping documents
 etc
PROCESSING
 Journaling
 Trasnferring journals to ledgers
 Summarizing
OUTPUTS
 Income Statements
 Balance Sheets
 Statement of Cash Flows
 etc
 Government & Not for
Profit Accounting

Financial Managerial
Accounting ACCOUNTING Accounting
DISCIPLINES

Auditing Tax Accounting

 Certified Public Accountant (CPA)

Prepare annual reports

Private or public accountant

FINANCIAL
ACCOUNTING

Provide accounting information and analyses for

people outside the organization.
 Certified Managerial Accountant (CMA)

MANGERIAL
ACCOUNTING

Provide accounting information and analyses to

managers to help them make decisions
 Certified Internal Auditor (CIA)

Independent audit

AUDITING

Auditor reviews and evaluates the information used to

prepare a company’s financial statements.
 Responsible for preparing tax returns, or
developing tax strategies.

TAX
ACCOUNTING

Accountant trained in tax law

 GOVERNMENT & NOT
FOR PROFIT
ACCOUNTING
Accounting system for organizations whose purpose is
not generating a profit but serving ratepayers,
taxpayers, and others according to a duly approved
budget.
 Users of ACCOUNTING
information

Managers Financial statements

Investors, owners, creditors, etc Tax returns

Financial statements and

Tax Officials
other internal documents
The ACCOUNTING cycle

Analyze source documents

Record transactions in journal

Transfer journal entries to ledger

Make trial balance

Prepare financial statements

Analyze financial statements

 The ACCOUNTING
equation

ASSETS = Liabilities + Owners’ equity

 FINANCIAL
STATEMENTS

The summary of all the financial transactions that have

occurred over a particular period.
 Statement of
Cash Flows

FINANCIAL
STATEMENTS

Income Balance
Statements Sheets
 BALANCE
SHEETS

A balance sheets shows the financial condition on a

specific time
 The BALANCE SHEETS
components

ASSETS LIABILITIES
Current Assets Accounts Payable
Fixed Assets Notes Payable
Intangible Assets Bonds Payable

OWNERS’ EQUITY
Owners’ Equity
Retained Earnings
 INCOME
STATEMENTS

The summary revenues, cost of goods, and expenses

(including taxes), for a specific period and highlights
the total profit or loss the firm experienced during that
period.
The INCOME STATEMENTS components

Revenues
Cost of Goods Sold
Operating Expenses
Net Profit or Loss
Calculating NET INCOME (or
net losses)

Revenues
Cost of Goods Sold
Gross Profit
Operating Expenses

Net Income Before Taxes

Taxes
Net Income/Net Losses
 STATEMENT OF
CASH FLOWS

Provides a summary of cash inflows and cash outflows

of the firm
The STATEMENT OF CASH FLOWS
components

Operations
Investments
Financing
 RATIO ANALYSIS

Ratio analysis is the assessment of a firm’s financial

condition using calculations and interpretations of
financial ratios developed from the firm’s financial
statements
 Liquidity Ratios

Debt Ratios Activity

RATIO Ratios
ANALYSIS

Profitability
Ratios
 LIQUIDITY RATIOS

Liquidity ratios measure a company’s ability to turn

assets into cash to pay its short-term debts (liabilities
that must be repaid within one year).
 Current assets
Current ratio = Current liabilities

LIQUIDITY RATIOS

Cash+Accounts receivable+Marketable securities

Acid-test ratio = Current liabilities
 DEBT RATIOS

Debt ratios measure the degree to which a firm relies

on borrowed funds in its operations
 DEBT RATIOS

Total liabilities
Debt to owners’ equity ratio = Owners′ equity
 PROFITABILITY
RATIOS

Profitability ratios measure how effectively a firm’s

managers are using its various resources to achieve
profits
 Net Income after taxes
Basic EPS = Number of common stock shares outstanding

Net income
Return on sales = Net sales

PROFITABILITY
RATIOS

Net income after tax

Return on Equity (ROE) = Total owners′ equity
 ACTIVITY RATIOS

Activity ratios tell us how effectively management is

turning over inventory
 ACTIVITY RATIOS

COGS
Inventory turnover = Average inventory
Thank You